Endowment Mortgage Policy

An endowment mortgage is an interest-only loan where the borrower pays off only the interest to the lender for the mortgaged property while the capital is paid at the end of the loan term through one or more endowment policies that the borrower has invested in. This type of mortgage deals is very common in the U.K. With the endowment mortgage policy, the borrower pays a monthly premium to the insurer who sells the endowment; when the policy matures, the borrower is able to repay the capital of the mortgage loan with the lump sum amount from the endowment policy, having already paid off the interest. Earlier, this type of investment-backed mortgages had tax advantages attracting many middle-income groups to benefit from this option; people who were not financially sound found the endowment mortgage policies an easy way to get mortgage loans as they had to pay only the interest at the moment and need not worry about the capital as the returns from the policy would help them to repay the original loan amount at a later time. The sale of endowment mortgage policies saw a boom in the late 1980s and early 1990s; but, now the scene has changed in the U.K. and the repayment of mortgage loans through endowment policies are no longer deemed legal.

The reasons for the decrease in the endowment policy sales for mortgage repayment purpose were mainly the poor stock market performance in the late 1990s and the mismanagement of the policies. Most of the endowment policies could not even deliver the promised amount; this left the borrowers in a lurch as the money they received was not enough to repay the capital of the mortgage loan. The combined effect of the low investment returns and stock market fall led to a decline in the popularity of the endowment mortgage deals and thus to a reduced endowment policy sales.

When the endowment mortgage policies were taking the borrower to more financial liabilities, they had to find other options to pay off the mortgage loan and dispose of their endowment policies. They began to surrender their policies to the life insurance company for a surrender value calculated by the insurer. Later on, third parties started to buy the policies from the insured persons for an added value and soon the endowment policy sales replaced surrendering the policies to the life assurance companies themselves for a lower amount; an industry of buying and selling second hand endowment policies thrived with Traded Endowment Specialists which were companies that functioned as intermediaries for endowment policy sales and purchase between the borrowers and buyers.